The Philippines’ only pure-play high-speed fixed broadband operator, Converge Information and Communications Technology Solutions, Inc. (PSE: CNVRG) (“Converge”) continued to deliver strong results during 1Q2021, reaching almost 1,182,000 residential subscribers by the end of the quarter.
As the fastest growing fixed broadband operator in the Philippines, the company deployed almost 0.5 million new fiber-to-the-home (“FTTH”) ports in during the quarter, almost twice the number of FTTH ports deployed during the same quarter the previous year.
As of March 31, 2021, Converge’s nationwide network reached more than 7.1 million homes, on track to reach the company’s target to cover approximately 55% of households in the Philippines by 2025.
Strong Financial Performance – Industry-leading Trifecta with 83.6% YoY Revenue Growth from 1Q2020 to 1Q2021, 55.0% EBITDA Margin, and 23.1% ROIC
Continued Strong Revenue Growth driven by our Residential Business
With strong and continued subscriber take-up, consolidated revenues grew by 83.6% from P3,021 million in 1Q2020 to P5,547 million in 1Q2021. Revenues from residential business more than doubled from P2,287 million in the first quarter of 2020 to P4,797 million in the same period of 2021, driven by a 92% YoY growth in the subscriber base, coupled with an 8% improvement in residential average revenue per user (“ARPU”). On the other hand, enterprise revenues grew slightly by almost 2.2% YoY, from P734 million to P749 million due to the impact of the pandemic on the various businesses in the country, which started around March 2020.
Residential subscribers grew to almost 1,182,000 as of March 31, 2021 from 615,466 as of March 31, 2020. During 1Q2021 and based on publicly available information, Converge captured 48% market share of fixed broadband net adds amongst the three largest broadband operators in the Philippines, representing an increase in fixed broadband market share from 19% in March 2020 to 27% in March 2021.
Reflecting the high demand for fixed broadband connectivity services in the Philippines, Converge estimates that c. 95% of new subscribers in 1Q2021 were first-time fixed broadband users. Driven by continuous demand for fiber plans, including increased take-up of add-on plans and premium packages, the monthly residential blended ARPU also improved from P1,284 during 1Q2020 to P1,390 in 1Q2021.
Revenues from the enterprise business grew by 2.2% YoY. Driven by the commitment to help uplift the local economy, especially during these unpredictable times, Converge launched a new SME plan Converge flexiBiz in March 2021.
The successful launch of flexiBiz allowed the company to grow its base of SME customers in 1Q2021, resulting in the overall enterprise customer base increasing from 10,378 unique customers as of March 31, 2020 to 12,400 as of March 31, 2021. This increase in the SME subscriber base also tempered the company's ARPU, which declined from P27,714 during 1Q2020 to P21,271 in 1Q2021.
Strong Profitability Growth in 1Q2021driven by Increased Scale and Cost Management Initiatives
Continued prudence in the management of direct costs, such as international bandwidth and leased line costs and increasing operating leverage contributed significantly to continuous EBITDA growth. Converge achieved a record quarterly EBITDA of P3,052 million in 1Q2021, representing an increase of 101.6% from 1Q2020. As a result, Converge’s consolidated EBITDA margins grew to 55.0% in 1Q2021 from 50.1% in 1Q2020.
In September 2020, Converge started to draw down on its international capacity from the Telstra Indefeasible Right of Use (“IRU”) contract, reducing the need to lease additional international bandwidth capacity. This, together with prudent management of other international lease agreements, resulted in a reduction of bandwidth and leased line costs from 10.0% of total revenues in 1Q2020 to 5.0% of total revenues in 1Q2021. As Converge continues to grow its revenue base, the company continues to benefit from increasing operating leverage, reflecting the scalable operating cost structure of Converge. For example, our total personnel cost decreased from 10.0% of total revenues in 1Q2020 to 7.6% of total revenues in 1Q2021.
Net income after tax almost tripled from P574 million in 1Q2020 to P1,549 million in 1Q2021. This resulted in an increase of Net Income margins to 27.9% in 1Q2021 from 19.0% the same quarter the year prior. Finance costs were lower in 1Q2021 due to repayment of outstanding loans. In addition, with the Corporate Recovery and Tax Incentives for Enterprises (“CREATE”) bill signed into law, the effective corporate income tax rate was reduced to 21% during 1Q2021.
Industry Leading ROIC and Strong Balance Sheet
Converge’s Return on Invested Capital (“ROIC”) improved to 23.1% in 1Q2021 from 20.0% during FY2020. This industry-leading performance is a result of Converge’s increased net profits in 1Q2021 and its consistent disciplined approach in deploying capital to expand its fiber network, and tracking key capital efficiency indicators such as its port utilization ratios. Converge has been able to maintain the blended port utilization ratio of 30% from December 2020 to March 2021, despite deploying almost 0.5 million FTTH ports during the quarter. As of March 31, 2021, we had achieved an average utilization of 38% on all FTTH ports deployed in NCR in the month of March 2020 (12 months after deployment) and an average utilization of 57% on all FTTH ports deployed in NCR in the month of September 2019 (18 months after deployment).
Converge has been able to maintain its strong balance sheet and cash flows with ample liquidity and gearing comfortably within bank covenants. The Company’s net debt position (as measured by total financial debt less cash and cash equivalents) is at P230 million as of March 31, 2021. In the first two months of 2021, the Company signed two seven-year credit facilities with an aggregate amount of P10.0 billion with two leading Philippine commercial banks and one short-term P1.0 billion credit facility with a Philippine commercial bank. Converge’s total undrawn debt facilities amounted to P29.4 million (~US$607 million) as of March 31, 2021. Our weighted average cost of debt from drawn debt facilities decreased from 5.4% in March 2020 to 4.9% in March 2021, reflecting a lower interest rate environment and increased strength of Converge’s credit profile. Converge's long-term debt facilities with five commercial banks, together with the company’s available cash and increasing operating cash flows, provide the firm with sufficient headroom to execute its capital expenditure plans in the mid-term.
Completed Connecting Visayas and Mindanao to our Nationwide Backbone in April 2021
The Company continued the rapid expansion of its nationwide fiber network. Almost 9,600 kilometers of fiber optic cable were added during the first quarter of the year, expanding our backbone and distribution network to more than 64,600 kilometers from about 55,000 kilometers laid down at the end of 2020. By April 2021, our fiber backbone had reached 69,000 kilometers. With Converge's network expansion, the company was able to extend its coverage to an additional 36 cities and municipalities during 1Q2021, extending services this quarter to provinces including Ilocos Sur, Pangasinan, Nueva Vizcaya, Nueva Ecija, Albay, and Batangas, among others allowing the company to reach a total of 352 cities and municipalities as of March 31, 2021.
As of April 2021, Converge’s expansion to the Visayas and Mindanao regions (“VisMin”) has been progressing as planned and hitting significant milestones. Converge's fiber cables have reached the shores of major VisMin cities of Cebu and Cagayan de Oro in April. The first phase of the ambitious VisMin backbone expansion project aims to complete seven inter-island subsea cable links, to allow Converge to complete a nationwide backbone stretching from the northern tip of Luzon to the Philippine’s main southern island of Mindanao. As of the end of April 2021, the company has completed five of the seven links and is on track to complete the remaining two links within 2Q2021, allowing the firm to launch our services commercially in VisMin by the second half of this year. After soft launching services in Cebu in November 2020, the company has also soft-launched on a small scale in Mindanao’s main city of Davao in April 2021 to test the markets ahead of the commercial launch.
Launched Innovative Products to Provide Better Value Plans to Customers
The Company recognized the need of our enterprise customers for flexibility in connectivity speeds during certain periods of the day. To address this requirement for flexibility, Converge launched the Dedicated Internet Access Time of Day product in February 2021. This provides enterprise customers with customized internet options with double their subscribed bandwidth during their chosen preset period, without having to double their monthly subscription fee. Likewise, our SME customers can now avail of the FlexiBiz plan where internet speeds are doubled during peak working hours of the day (7:00 a.m. – 6:59 p.m.).
The company also launched the Converge FiberX Time of Day plan for residential subscribers, giving customers the option to avail of higher bandwidth at during the period of their choosing. Households can opt for higher bandwidth for work from home and online schooling requirements during the day, or alternatively, select seamless consumption of bandwidth intensive entertainment content such as online games and video streaming at night. We offer Day Plan or Night Plan, which similarly boosts their speed to twice of their subscribed plan during their chosen time of day.
“Right now, for our customers to better adjust to the changing norms, they need a tool that adjusts to them, as well. By introducing our Converge Time of Day products, we aim to provide our subscribers from all segments custom internet options, giving them more bandwidth when needed and, equally important, enabling them to save on costs,” Converge Chief Operations Officer Jesus Romero said.
Continued Commitment to Improving Customer Experience
In March 2021, Converge installed more than 91% of new NCR subscribers within seven days and 50% within one day of application, respectively. In addition, the company continued to expand iys contact agent team by adding more than 150 seats during the first quarter to cater to customer queries from the expanding subscriber base. Answer Call Rates, which measures the number of voice calls that contact centers answered during the quarter divided by all of the voice calls received (during both peak and off-peak hours), further improved from 87% during 4Q2020 to 94% during 1Q2021.
During the third quarter of last year, the company rolled out its mobile application Converge Xperience App, which offers a convenient channel for its customers to review and pay their bills, and allows customers to log tickets online. As of March 31, 2021, more than 433,000 subscribers have registered in the application, representing 37% of residential subscribers as of the end of the period.
Announced International Bandwidth Capacity Investment into the 15,000 km transpacific cable system “Bifrost”
In April 2021, Converge signed a binding term sheet with Keppel Telecommunications & Transportation’s wholly-owned subsidiary, Keppel Midgard Holdings Pte. Ltd. (“KMH”) to grant Converge an IRU for one fiber pair on the main trunk of Bifrost Cable System, which directly connects Singapore to the west coast of North America.
KMH and Converge will also jointly develop a branch on the Bifrost Cable System that will land in Davao, Philippines, with Converge also being granted an IRU on the entire Davao branch. The additional branch will significantly increase internet speeds and network diversity for businesses and consumers in the Philippines. Converge will invest over U.S.$100 million (around P5 billion) for the whole project. The completion of the proposed transaction is subject to negotiation and execution of definitive agreements, and relevant regulatory approvals.
Expected to be completed in 2024 and spanning over 15,000 km, the Bifrost Cable System is the world’s first subsea cable system that directly connects Singapore to the west coast of North America via Indonesia through the Java Sea and Celebes Sea. It will connect Singapore, Indonesia, the Philippines, Guam, and the west coast of North America. In line with Converge’s strategy to secure proprietary access to international bandwidth on certain key international routes, we plan to use the bandwidth on the Bifrost cable system to secure sustainable and cost-efficient international connectivity for Converge, while also exploring the possibility to re-sell international bandwidth to third parties through wholesale agreements.
Recognitions Received for Reliable Performance and Rampant Growth
With the improvements, Converge strives to ensure that subscribers can enjoy the benefits of quality internet services, including video streaming. Converge again ranked first in Netflix’s monthly ISP Speed Index for the Philippines during the first three months of the year, which ranks internet service providers in terms of prime-time Netflix performance.
Converge has nearly doubled its average download speed, the strongest speed increase among internet service providers in the country to an average 42.43 Mbps download speed in the first quarter of the year compared to the average 28.88 Mbps in the previous quarter, according to quarterly speedtest data from Ookla. Ookla also recently validated that Converge delivered the most consistent speed among fixed broadband providers in Metro Manila, Calabarzon (Cavite-Laguna-Batangas-Rizal-Quezon), Ilocos, Central Luzon, and the Cordillera Administrative Region in the first quarter of the year.
“We’ve always had our customers’ needs in mind. From our free speed increase to all plans late last year to introducing new products like the Converge FiberX Time of Day, we are all about better experiences for our subscribers,” according to Converge CEO and Founder Dennis Anthony Uy.
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